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Bad to Worse
You know I’ve talked about the looming wave of public pension debt and the damage caused by unrealistic expectations and mismanagement.
But the fact is, things may be much worse than even I anticipated.
Recent findings from Stanford University and several state agencies indicate how dire pension underfunding really is.
Consider the following …
Stanford University’s Pension Tracker estimates California’s state pension was underfunded by $1 trillion in 2015, which equates to $93,000 per California household.
That’s almost as bad as Illinois, where the ratio of unfunded pension liabilities – estimated at $130 billion – to financial resources stands at a whopping 37.6%.
Illinois government-worker pensions now consume more than 25% of the state's budget, more than virtually every other item, and they are crowding out everything from education to social services.
At risk is the state’s bond rating that is inching toward junk status. AND its shrinking tax base.
So, what happened?
Cause #1: Ludicrous return assumptions. With last year’s CalPERS return of 0.6% falling well short of the 7.5% forecast. The blowback now has top investment fund managers suggesting that return forecasts should be lowered.
Because of the shortfall, retirement benefits in Los Angeles consume one out of every $5.00 in the general fund budget. And that crowds out funding for other public services.
Cause #2: Overpromise. That is what happened in Dallas, where a lucky few in the Dallas Police and Fire Pension Fund (DPFP) took advantage of the Deferred Retirement Option Plan (DROP). This program, aimed at keeping veteran members on the force, offered a savings account paying a guaranteed rate of 8% per year. Also included was a 4% annual inflation benefit.
Cause #3: Fraud. Soured real estate investments in Dallas’s investment portfolio prompted an April 2016 FBI investigation (raid) that ultimately led to a 32% markdown in their entire real estate book.
As a result, the Dallas Police and Fire Pension Fund (DPFP) is underfunded by $3.0 billion. Directors at the fund are now seeking a $1.1 billion infusion from tax payers to keep the fund afloat.
What does this mean to you?
Fraud and mismanagement in the state pension fund systems can no longer be swept under the carpet. My models indicate that the day of reckoning is quickly approaching – sometime in the second half of 2017.
This crisis will fuel further distrust in government, guarantee higher taxes and — along with other forces, international in nature — put us closer to a sovereign debt crisis unlike anything we’ve seen before.
The way I see it, the forecast is for pain – from a nasty cocktail of higher taxes, reduced retirement benefits and less money for public services.
This also plays into a loss of confidence in government and plays into the war cycles I’ve warned you about as well.
My advice: Hold onto your hats. And make sure you have solid investment advice like my members enjoy.
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Stay tuned and best wishes,